I wrote about adding to one of my largest positions last week, and it left a few people scratching their heads. I stand by my decision to nibble on Roku (NASDAQ:ROKU) -- twice -- last week, but when I shared my reasoning on Twitter, some questioned the long-term potential of the streaming-video pioneer. 

I didn't expect everyone to agree with my bullishness when it comes to Roku. The stock has shed roughly half of its value since peaking this summer. Here's a sampling of some of the knocks and concerns about Roku as a buying opportunity:

  • Does anyone really see set-top boxes or peripheral devices for new TVs existing in five years? Roku goes to the graveyard in five years unless it completely changes course in its biz.
  • Do you think that the rest of the investor public will continue to believe in that extreme growth narrative, which a 90x value implies?
  • I switched to Chromecast. YouTube is more important to me than Roku.

You don't post on the socials expecting uniform head nodding, and I naturally welcome all dissenting opinions. It is considering all angles that makes one a better investor. Let me tackle why I remain upbeat about Roku stock despite concerns about the future of streaming dongles, earnings-based valuations, and Roku negotiating in public with Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube. 

Someone curled up on a couch, channel surfing.

Image source: Getty Images.

A stream is a wish your heart makes

Let's start with the dongle. Roku is the leader in this niche, despite tech behemoths Google, Amazon (NASDAQ:AMZN), and to a lesser extent Apple (NASDAQ:AAPL) being willing to sacrifice margins to get their hardware into your homes. Dongles are cheap, starting as low $20 to $30. The stakes have never been higher. The streaming hubs are free for consumers once they find a way to get connected, but monetization for the providers continues to explode. The average revenue per user that Roku is generating clocks in at $40.10 for the 12-month period through September, up 49% from where it was a year ago. 

Roku's operating system has nearly a third of the global streaming market, a 31.1% share compared to Amazon's Fire TV at 16.8%. And that gap has widened over the past year. Dongles might seem inconvenient, and paying $20 and sacrificing an HDMI slot isn't ideal, but the alternative could be worse.

I was an early adopter of smart TVs. I bought one of the original Google TVs a decade ago. I outfitted my vacation home with Samsung smart TVs in 2014. They would be useless without a dongle, which in my case just happens to be a Roku. Why replace a TV because an operating system platform fades, when a refresh is just a dongle purchase away?

If you continue to insist that the dongle is dead, how do you suggest that folks connect to streaming services in the future? If you insist that it's in the TV itself, well -- good news for Roku. It's the market leader there, too: It ships as the default operating system in 38% of all smart TVs sold in this country.

Moving on to valuation, judging Roku on its earnings multiple at this stage of its growth cycle doesn't seem fair. Hardware is selling at a loss as a way to generate higher-margin platform revenue in the future. There are also near-term supply chain constraints for the industry.    

The price-to-earnings (P/E) math isn't pretty. Roku is trading at more than 150 times next year's earnings, but the multiple gets kinder with Wall Street pros seeing explosive profitability after that: 

  • 2022: $1.50 a share
  • 2023: $2.92
  • 2024: $4.79
  • 2025: $6.93

With profitability expected to more than quadruple between 2022 and 2025, the P/E ratio drops from triple digits to 33. It's still a high multiple, but keep in mind that Roku has landed at least 333% ahead of analyst quarterly profit targets over the past year. If history repeats, the stock is trading at much lower future multiples than what Wall Street is currently forecasting. 

The final knock is more current. Roku is in negotiations with Google to extend its app contract with YouTube and YouTube TV. If the sides don't come to terms, it could put an end to app updates as well as leaving new users unable to have access to YouTube. 

Losing YouTube would be a pretty big deal. But you can be sure that Alphabet would also have a lot to lose in this climate of anti-competitive regulatory oversight if it would try to give Chromecast a boost in market share by walking away from support for the rival market leader.

Roku continues to be the agnostic darling with thousands of available apps. All of the lesser platforms have also had their tussles with streaming services. Remember when HBO Max and Peacock weren't available on Roku at launch? Everything ultimately gets resolved when both parties have a lot at stake. Roku is the top dog among streaming service stocks now, and it has the tools to stay that way. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.